Report analyzing outside counsel spending brews controversy

For general counsel, the ability to analyze and control outside counsel spending is vital to the goal of managing legal department costs. A controversy is brewing, however, over a soon-to-be published report analyzing law department spend using law firm invoices.

The 2010 Real Rate Report—a study conducted by CT TyMetrix, an e-billing and matter management service provider, and research group Corporate Executive Board—is scheduled for release in September. It analyzes legal spend from invoices 4,000 law firms submitted to corporate legal departments of various sizes and industries. The study examines $4.1 billion in invoices from 50,000 individual billers across nine different practice areas in 51 metropolitan areas from 2007 to 2009, says Julie Peck, vice president of corporate strategy and market development at CT TyMetrix. Peck declined to state the number of legal departments included in the study.

Past corporate legal department benchmarking reports have been based on spending information that law departments report in surveys, not on actual billing data, Peck says. By analyzing the billing data, she says the upcoming report reveals “how different matter types are being staffed by law firms, what partner time is allocated to a specific type of matter, along with associate and paralegal time, and the overall cost and duration of certain matter types and phases.” The findings are segmented by geography, law firm size, staffing, and matter type and phase.

Since CT TyMetrix released its initial findings, Peck has received numerous phone calls from law firms complaining that they did not agree to release their e-billing data. “My phone has been ringing steadily,” Peck says. Her response has been that the e-billing data belongs to CT TyMetrix’s law department clients, not to the outside law firms, and that law departments agreed to contribute to the proprietary database. She also points out that no law firm, individual biller or matter can be identified in the results.

Rashad Porter, product strategy and services manager at DataCert, another legal department spend management service provider, disagrees with the CT TyMetrix approach. He says DataCert releases periodic benchmark study results only to customers who participate in the study.

“We never sell our customers’ data,” Porter says. His company’s most recent report “reviewed several billion dollars worth of spend data at the firm, invoice and matter level, which enabled customers to benchmark their spends and identify trends, highlighting areas for possible reduction.” Porter said each DataCert study is unique in terms of how the specific metrics are benchmarked but declined to provide examples of trends they have identified or specific results, citing customer confidentiality.

Startling Results

CT TyMetrix, on the other hand, sparked interest in the Real Rate Report by releasing some startling findings. For example, billing data from partners, associates and paralegals showed that 78 percent of these timekeepers bill different hourly rates to different clients for similar work. The largest rate difference was a partner who billed between $350 and $1,000 an hour, depending on the client.

“That is absolutely a function of buying and negotiating power,” Peck says, given varying sizes of company legal portfolios.

The Real Rate Report also found that the 2009 median partner rate was $340 per hour, lower than the typical “rack” rates reported through law firm and corporate legal department surveys. On the high end, partners charged up to $1,590 per hour for work with major corporate customers.

Regarding rates for the work of inexperienced associates, “the report quantifies to the dollar exactly how much you pay for each year of associate experience,” Peck says. “Invoices are looked at before and after adjustments. The data tells us how much money is actually going out the door.”

Peck says the report also shows how rates have changed in the past three years. The results are not what one might expect given the economic downturn, she says.

Metrics Matter

Such benchmarking data is critical in answering questions such as: How much are my competitors being charged for legal work? How can I price an alternative fee agreement if I don’t know how much this type of work tends to cost?

Rees Morrison, a law department consultant and InsideCounsel.com columnist, believes the CT TyMetrix report will be a benefit to law departments.

“Every general counsel would welcome having real data on what law firms actually charge, even if that is only on an hourly basis,” Morrison says. “Eventually, data will give rough outlines of what various matters cost. … Emphatically this is information law departments welcome, but law firms will be resistant. Any time costs become more transparent, costs drop because comparisons are easier.”

All experts agree that analyzing spend involves a variety of metrics and that billing rates are only one factor. As Scott Giordano, director of product marketing at e-billing service provider Mitratech points out, comparing rates alone can be rather useless information. “Rate, volume of work and time all need to be compared to results,” he says.

Peck adds that many companies do not take the time to “drill down” or analyze their own data, which is possible with sophisticated e-billing and matter management systems. The analytics can identify matters, resources or processes most driving results. For example, how would a company’s settlement strategy change if its law department knows how long and how expensive a type of matter tends to be?

System Design

Experts agree that internal metrics measurement systems must be carefully designed for each company and legal practice area. “If you don’t classify matters correctly according to type, complexity, number of litigants, etc., it is very difficult to even measure these metrics,” Giordano says.

An effective system integrates outside counsel billing data with other data captured in matter management and other systems.

“In addition to invoices, all of a company’s information from a variety of sources like project management or other legal systems can be captured in a single platform with a common database, and can be pulled together into reports and dashboards using a business intelligence engine,” Porter says. “This provides a consolidated view of a matter’s resource allocation, phase/task status and spend. As a result, clients have a more comprehensive picture of the status of a matter from various perspectives, enabling them to quickly make decisions, such as adding more resources, adjusting the budget and adding reserves.”

Such systems also can provide controls by alerting a law department when cases go over budget.

“Our case managers get a warning ping when an invoice being presented for payment pushes the budget burn rate significantly past the number of months/overall year percentage,” says Ken Vermilion, senior director at WalMart Legal Services. “For example, if a matter budget is $12,000 and an invoice for $3,000 is presented for payment in the first month of the fiscal year, bells go off.”